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Christmas in jail for perpetrators of Australia's worst case of insider trading

Lukas Kamay, 26, (former NAB banker), and Christopher Hill, 25, (former Australian Bureau of Statistics (ABS) employee) will spend Christmas in jail after they pleaded guilty to insider trading last week and had their bail revoked before sentencing in February.

In this Alert, Partner Michael Hansel and Associate Katherine Hammond discuss the recent NAB / ABS insider trading scam that has been described by Prosecutor, Mr Robert Bromwich SC, as “the worst instance of insider trading to come before the courts in Australia”, with a focus on the potential penalties for insider trading.

Key points

Kamay and Hill made an estimated $7 million profits by using unreleased ABS data to make foreign exchange trades.

The potential penalties for insider trading are severe and often a prison sentence is imposed.

Authorities have a number of tools to catch insider traders.

Insider trading

The insider trading laws mean, in broad terms, that if a person has inside information they must not:

communicate inside information for the purpose of another person trading with that information.

“Inside information” is essentially information which is not generally available and which, if it was generally available, a reasonable person would expect to have a material effect on the price or value of prescribed financial products.

The ABS Insider Trading case

It is alleged that Kamay used confidential and price sensitive ABS economic data provided by his university friend, Hill, to trade in foreign exchange derivative contracts and is alleged to have made profits of over $7 million.

It is alleged that on a number of occasions Hill provided confidential data on jobs, retail sales, building approvals, capital expenditure and housing finance. The release of this type of data will often affect the value of the Australian dollar and it is alleged that Kamay would use the data to buy foreign exchange derivative contracts in the minutes before the regular 11.30am release of the ABS data, and then sell the contracts shortly after.

The scam was uncovered by a broker who noticed that his client (Kamay) was making significant bets on the Australian dollar shortly before the announcement of important economic news. He discovered on LinkedIn that Kamay was friends with an ABS employee (Hill) and notified the Australian Federal Police which sparked a nine month surveillance operation where Hill and Kamay were monitored in their offices using surveillance cameras and phone taps.

The charges

Kamay has pleaded guilty to seven charges including insider trading, identity theft and money laundering charges. Hill has pleaded guilty to six offences including insider trading, identity theft and breach of public office.

Insider trading carries a maximum 10 year prison sentence. Money laundering carries a maximum of 20 years and breach of public office carries a maximum of five years in jail

Prosecutor, Mr Robert Bromwich SC, has described Kamay’s offences as “calculated” and “bereft of any redeeming features”, and said Hill’s breaches of public office were in the worst category. He has called for significant jail time for both men to be punished and to deter others from committing these types of crimes.

Insider trading penalties

The potential penalties for insider trading are severe and a jail term is generally imposed. This is because insider trading is a form of fraud which damages market integrity and the public’s trust in the market, which is critical to its viability.

Insider trading is both a criminal and a civil offence under the Corporations Act 2001 (Cth).

For the criminal offence, where insider trading would need to be proven beyond a reasonable doubt, the penalties were doubled in 2010. For an individual the maximum is now imprisonment for up to 10 years and/ or a fine of $765,000 or three times the benefit gained (whichever is greater).

For the civil offence, where insider trading only needs to be proven on the balance of probabilities, the maximum penalty for an individual is $200,000.

In March 2014 ASIC released a report, “Report 387: Penalties for corporate wrongdoing” calling for tougher civil penalties in Australia which are out of sync with many international counterparts.

Catching the offenders

Since 2009 ASIC has prosecuted 34 insider trading matters. Of those matters, 23 have been successful with four still before the courts. Apart from relying on tip-offs there are a number of ways that insider’s might be caught:

Suspicious activity reporting obligations

Since November 2012[1] a market participant (such as a broker) must notify ASIC if it has reasonable grounds to suspect that a person has placed an order or entered into a transaction while in possession of inside information. There is a $20,000 penalty for failing to comply.

ASIC’s monitoring of insider trading

ASIC has a real-time market surveillance system, known as Market Analysis Intelligence (MAI) which went live in late 2013 and enables ASIC to detect, investigate and prosecute trading breaches.

The MAI provides sophisticated data to identify suspicious trading in real time and across markets. The MAI is built around algorithmic trading technology and allows ASIC to analyse trade data for patterns and relationships.

Queries from ASIC during deals

After a transaction is announced ASIC will look back over the share price movements around the time of the transaction and see if there are any unexplained fluctuations. There are invariably fluctuations and advisors are frequently asked to (voluntarily) provide details about who knew about the deal and when, and if the advisors are aware of any information which has not been disclosed.

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